Venture capital co-investment in Canada

Networks are a hot topic these days. With better ways to visualize and analyze data, it becomes easier than ever to take a network view of almost any kind of activity. The Data Catalyst team is lucky enough to have some venture capital data and we thought it would be interesting to apply some analysis to see what emerges. Do venture capitalists co-invest regularly? What are some trends that emerge?

The data for this analysis comes from Thomson ONE, a database that tracks private equity deals. Narrowing our focus to venture capital firms that invested in Canadian-based companies, we chose to capture only seed- and early-stage investment[1]. As well, we initially gathered slightly over 10 years of data (January 1, 2003 to February 28, 2013).

What this gave us is a pool of 382 disclosed firms[2] that have invested in 1,014 companies in 2,081 deals[3] and $2.36 billion in disclosed and estimated equity.[4] Other factors that came in handy were whether the investment made by that firm was a new or follow-on investment and the industry of the company that received the investment.

Who are the top co-investors?

This has typically been measured by the number of co-investments a venture capital firm has made. Using that yardstick, who do we get?

What does “active firm” mean?

For this, we examined whether a given firm has made a new investment (not a follow-on investment) from 2012 onward. Out of our list of 382 firms, 82 are considered “active.” In the above list, iNovia Capital ended up replacing Innovatech Québec et Chaudière–Appalaches.[6] However, there is a problem with this kind of ranking. The top co-investors are also the top investors over that time period. In other words, sure the top investor is the Business Development Bank of Canada, but by the law of averages, it is no surprise they are also the top co-investor.

True love vs. one-night stands

Digging a little deeper, who are the groups of firms who co-invest the most frequently together? For this, we focused only on active firms (described previously). In this case, we captured all possible combinations into a list, and then we obtained the top ten “love affairs” that we presume are still active.

There are lots of observations to make here. The first is that out of the collective number of deals above, the number of deals that any two firms actually do together is relatively small, peaking at just over 10% (GrowthWorks and Business Development Bank of Canada) from a little less than 2% (Chrysalix and—you guessed it—the Business Development Bank of Canada). So you can infer from this that Canadian venture capitalists are not “cliquey” or “clubby”—that is, they do not appear to prefer some firms over others when co-investing as suggested by others.

The second is that (yet again) the Business Development Bank of Canada figures prominently in this list, in six out of the 10 matches.

In order to gain better insight from the numbers above, we need some other measure besides these aggregate numbers. For that, we came up with something we are calling a “loyalty score.”

The loyalty score

There are a number of ways to come up with this measure, but we opted for something simple that would level the playing field. We took the highest incidence of co-investment for a particular firm and divided it by the number of co-investments that firm could have made. This would give a loyalty score between 0 and 1, where 0 means they never co-invested with the same firm twice, and 1means they were “perfectly loyal” and only ever invested with the same firm.

For example, GrowthWorks had 151 opportunities to co-invest but only invested 43 times at most with the same firm (Business Development Bank of Canada). Therefore, dividing 43 into 151 yields a loyalty score of 0.285.

Additionally, we filtered on firms that have made at least 10 investments, so there is an established pattern of activity. The number of investments for these firms ranges from 15 to 38, so these are not firms that have made hundreds of investments. Interestingly, while they are all Canadian firms, they are located all over the country.

Now that every firm has a score, who is the most loyal? Here’s a list of the top five most loyal, active firms:

Firms with the highest loyalty score that have more than 10 deals that were co-investments.[8]

Firm name

Loyalty score

Average total deal size ($M CAD)

Firm location

New Brunswick Innovation Foundation

0.4

0.73

Fredericton, NB

Innovacorp

0.33

1.06

Halifax, NS

Discovery Capital Corporation

0.33

1.51

Vancouver, BC

Fondaction

0.33

1.77

Montreal, QC

VentureLink Funds

0.29

2.4

Toronto, ON

Considering the loyalty score can be as high as 1, the fact that the “most loyal” firm in our data set is only 0.4 is interesting.

We’re the first to admit the loyalty score isn’t perfect. It can only be used for deals where the venture capital firm names are disclosed; in this data set a firm may be identified as having participated in a deal but their name is left out.[9] Also, while the measure is reasonably good for catching two-firm relationships, it does not extend out to a multidimensional three- or four-firm analysis.

Given these limitations, what other analysis can we perform using the loyalty score? Here is a data visualization that cross-references the loyalty score to the number of co-investments made by active firms.

What this shows is how loyal a firm is (the x-axis) by the number of their deals that were co-investments. Admittedly, there is some noise (high loyalty scores based on only one or two co-investments), but the main takeaway is that firms do not necessarily become “more loyal” even if they have a large number of co-investments. If they did, you would see much more activity in the upper mid-to-right side of the graphic and less activity in the upper left.

Visualizing the network

To allow you to do your own analysis and see the landscape and its connections more clearly, we worked with Gabe Sawhney, a local data designer, to create an interactive network visualization.

The visualization shows all firms, regardless of whether they are active investors as we have been defining them, for the entire 10-year time frame we’ve been considering. You can click, drag and move various nodes to see who has co-invested with whom.

It is no surprise that the heavy hitters (Business Development Bank of Canada, GrowthWorks, Desjardins) we previously identified as leading the pack in terms of co-investment make a very robust cluster with a number of other firms on the outside. Aside from a few smaller, isolated, non-connected nodes, all other nodes exhibit some degree of connection to the main web. Another group of venture capital firms located in the US and other countries have never connected to this main network.

What do you see? Is there any insight about co-investment in Canada’s venture capital community that we haven’t addressed?

1. Thomson Reuters ONE online help defines seed-stage as an investment strategy involving portfolio companies that have not yet fully established commercial operations, and may also involve continued research and product development. It defines early-stage as funds that make a majority of their investments in companies that have product development, initial marketing, manufacturing and sales activities already in testing or production. The investments are used by the company to begin production and sales. In some cases, the product may have just been made commercially available. These companies may not yet be generating profits. The companies may be in the process of organizing, or they may already be in business for three years or less. Usually such firms will have made market studies, assembled key management and developed a business plan, and are ready or have already started conducting business.

2. Not all firm names in venture capital deals are disclosed. In other cases, the firm names are disclosed, but the dollar amounts of the deal are not.

3. Venture capital firms may invest more than once in the same company (as a “new” or “follow on” investment).

4. Thomson Reuters will in some cases estimate the amount of equity invested based on information available to them. In other cases, the amounts will be fully disclosed to Thomson Reuters.

5. Source: Thomson ONE, January 1, 2003 to February 28, 2013. Canadian firms, filtering on seed- and-early stage. Some investments were made in companies that Thomson ONE reports to have a head office in Ontario, but whose business descriptions indicated they were US-based.

6. Most recent “new” investments for Innovatech, who would have made the top five, were in July, 2011 (therefore, not “active”).

8. Source: Thomson ONE, January 1, 2003 to February 28, 2013. Canadian firms, filtering on seed- and-early stage. The loyalty score is obtained by dividing the highest incidence of co-investment by the number of co-investments. Some investments were made in companies that Thomson ONE reports to have a head office in Ontario, but whose business descriptions indicated they were US-based.